Amid rising cost pressures and economic uncertainty, sustainability has, in some regions — particularly the US — slipped down the corporate agenda. Businesses are reassessing their sustainability commitments in order to balance sustainability objectives with financial considerations.
However, these challenges also present opportunities. As firms rethink their value chains and operations, a strong sustainability focus can ensure access to capital, talent, and sustainable supply chain resilience in the long term. In this uncertain climate, businesses need to respond in the short term while planning for long-term value creation.
Since the announcement of the reciprocal tariffs, businesses across industries have been grappling with supply chain disruptions and rising costs. One significant impact has been on green technologies and critical resources. The increasing costs of components like batteries and motors are making electric vehicles more expensive, potentially slowing their adoption and delaying progress for businesses transitioning to electric fleets to achieve their sustainability targets. If a consequence of the tariffs is increased prices and restrictions on availability of solar panels, wind turbines, and rare earth minerals, this will result in higher costs for renewable energy projects and a potential slowdown in the transition to renewable energy sources.
While rationalising costs and protecting profit margins is a priority, businesses recalibrating their supply chains in response to current challenges must also consider the social impact of their decisions. Developing countries, reliant on exports to larger economies, are likely to be disproportionately affected by the tariffs, exacerbating global and local inequalities.
However, these tariffs have the potential to act as a catalyst for innovation. Faced with increased costs or uncertainty, businesses have the opportunity to redesign their supply chains and manufacturing processes to be more robust and sustainable, leading to long-term improvements in operational efficiency and resilience.
A critical opportunity lies in shortening supply chains. With international sourcing becoming more costly, companies are incentivised to develop relationships with local suppliers and explore innovative solutions, reducing transport carbon emissions and strengthening sustainability efforts.
Potential increases in raw material costs are also an opportunity for businesses to focus on the lifecycle of their products. Instead of producing solely new goods, companies can increase focus on maintaining, repairing, and repurposing existing products, promoting a circular economy. This approach reduces waste, helping companies meet their sustainability commitments and Net Zero goals.
Legislation such as the Corporate Sustainability Reporting Directive (CSRD) and the growing focus on sustainability reporting have driven businesses to better understand their supply chains. Many companies now track material sources, product destinations and supply chain relationships, from raw materials to disposal. This data can help identify risks beyond sustainability and address the impact of tariff disruptions.
Despite the impact of tariffs putting pressure on margins, neglecting sustainability initiatives can lead to greater challenges for businesses. For example, as the impacts of climate change become more significant, managing environmental risks has become more prominent on investors’ radars. They want to understand how businesses identify these risks and what measures they're taking to address them, as it influences not only their decisions to invest, but also their exit strategy in the future.
For businesses with sustainability-linked loans, if tariffs increase costs it could result in a decision to slow down sustainable progress, impacting their ability to achieve their sustainability KPIs, leading to higher interest rates or renegotiation of terms. Banks recognise that not all businesses will endure the challenges posed by climate change or other disruptions and need to ensure their investments are strategically placed to minimise risk. To meet investor expectations, businesses must ensure clear and transparent communication and reporting on their strategies for managing risks to maintain investor confidence and trust.
Leadership teams play a pivotal role in driving the shift towards sustainable practices. While the US tariffs have disrupted the trade environment, business leaders should seize this opportunity to reassess their sustainable priorities and sustainability roadmaps.
As leadership teams move beyond immediate responses, here are four actions that business leaders can take to prepare for future challenges and drive long-term growth:
For more insight and guidance, connect with our team: Ben Langford, Laura Gardner and Paul Holland.
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